Chevron Cuts Layers, Eyes Guyana and Growth

Cost-cutting among energy companies is all the rage today. Oil prices are stable, but memories of recent devastation are still fresh, so Big Oil is cutting costs to stay in shape. One way to do it: centralize operations, which is what Chevron is doing right now.

The idea is straightforward: simplicity is cheaper than complicatedness. So Chevron is going simpler by having just one global offshore business division manage all of its offshore operations, from the Gulf to Nigeria, and just one division handling human resources, information technology and finance—out of the Philippines and Argentina.

“We’re working so hard to simplify our structure, take some layers out so that we can execute faster,” Chevron vice chairman Mark Nelson told Bloomberg in an interview this week. “Best practices are decided upon and applied across the system regardless of what continent they happen to sit on.”

The simplification drive follows from a cost-cutting plan announced back in February that would see Chevron shed a fifth of its global workforce and save $3 billion in costs. The plan was prompted by the supermajor’s offer to acquire Hess Corp. for $53 billion, even though the finalization of that deal remains uncertain until the International Chamber of Commerce announces its ruling on the dispute with Exxon.

Related: Big Oil Braces for Oil Price Hit

Yet even without the deal, chances are Chevron would go ahead with the cost-cutting—because these days oil companies need to work to win investors, at least according to Bloomberg. The publication pointed out in its report that oil price volatility and what it called “an uncertain outlook for fossil fuels” had made investors more demanding in terms of dividends and share repurchases. This had, in turn, forced company executives to prioritize shareholder returns over other business objectives.

That oil prices are volatile is certainly true, and that volatility is of a new, software-driven sort as a lot of oil trades follow algorithms rather than human decisions. As for the uncertainty in the outlook for hydrocarbons, there are plenty of signs that demand for them is still going to be around decades in the future—and the size of that demand will not be very different from what it is today, despite all the forecasts predicting peak demand growth before 2030. Those forecasts are based on computer models and an abundance of wishful thinking, which has incidentally contributed to the heightened volatility of oil prices as spikes tend to occur when physical, real-world data shows demand to be stronger than assumed.

This is why Chevron may be streamlining its operations and laying off staff, but it is also pursuing production growth. Earlier this year, for instance, Chevron announced plans to drill in Namibia, where some other Big Oil majors had made significant discoveries in recent years. The supermajor is also investing in exploration in Nigeria and Angola, and last month won the rights to explore nine offshore blocks in Brazil’s Foz do Amazonas basin.

Then there is, of course, the Hess Corp. deal, which is perhaps the best evidence that Chevron is realistic about the future of oil demand. Hess Corp. is Exxon’s partner in Guyana’s Stabroek Block. It has a 30% stake in that block and the over 11 billion barrels of oil sitting underneath it. Chevron wants that stake—and who wouldn’t, except the devout believers in peak oil demand?

Cost-cutting in oil and gas is all the rage today, but it is easy to focus on just some of the more obvious reasons, such as investor perceptions about the future prospects of the industry, reinforced copiously by media that openly embraces the ideology of net zero. The deeper reason, however, may well be a desire to boost resilience in case of future shocks.

By Irina Slav for Oilprice.com